Insurance Defense

Recent Insurance Decisions of Note

Over the past several months, there have been several decisions which are potentially significant to the practice of insurance law. These decisions involve arbitration, medical malpractice, notice provisions of “claims made” insurance policies, and federal preemption.

Always, each case involves different facts and law, and accordingly the following must be taken for general information purposes only, rather than for action upon any specific fact situation.

No Independent Appeal Available From Arbitration Award Despite Arbitrators’ Manifest Disregard Of  The Law:

In Citigroup Global Markets, Inc. v. Bacon, 07-20670 (5th Cir., March 18, 2009), the United States Fifth Circuit Court of Appeals reviewed the recent United States Supreme Court decision in Hall Street Associates, L.L.C. v Mattel Inc., 128 S. Ct. 1396, 1403 (2008) and ruled that within the Fifth Circuit (which includes Texas Federal Courts), “manifest disregard of the law” by arbitrators in reaching an arbitration award is no longer an independent non-statutory ground for vacating such an award under the Federal Arbitration Act (“FAA”). Although the 5th Circuit left open a narrow possibility that legal errors by arbitrators might be the subject of appeal if they can be framed so as to come within the statutory grounds for appeal under § 10 of the FAA, such is not a foregone conclusion.

This decision will likely be followed by a decision from our Texas Supreme Court which has just agreed to hear an appeal in Quinn v. Nafta Traders, Inc., 257 S.W. 3rd 795 (Tex. App., Dallas 2008) wherein Dallas Court of Appeals ruled that parties may not contractually expand the scope of judicial review of an arbitrator’s decision to include grounds for reversal which are not expressly identified in the Texas General Arbitration Act.

Thus, it is becoming ever more apparent that if one wishes one’s claims to be determined with regard to the predictability flowing from the rule of law, and to have a real and effective right of appeal from an adverse result, then arbitration should be avoided.

Medical Malpractice- Exception:

In Phillips v. Bramlett, Cause No. 07-0522 (Texas March 9, 2009), the Supreme Court dealt with the interplay between the statutory liability cap upon damages in Texas Medical Liability and Insurance Improvement Act as it ex isted prior to September 1, 2003, and the statutory “Stowers exception” contained in the same Act, which provided in part that “This section shall not limit the liability of any insurer….” The court concluded that the Stowers exception of Article 4590i Section 11.02 (c) expressly applied to insurers only and did not waive the liability cap of section 11.02 (a) generally. This means that when insurance coverage is below the statutory damages cap, the “Stowers exception” claim may be shared by the insured physician and the injured party because each will potentially have excess claims when the damage finding exceeds the statutory damage cap. Conversely, when insurance coverage is above the statutory damages cap, the physician is fully protected, and only the injured third party need pursue the statutory “Stowers exception.”

The effect of this decision to other pending and future cases should be fairly limited since Section 74.303(d) of our medical liability statute was amended in Texas’ Tort Reform Act, effective September 1, 2003, to provide that “the liability of any insurer under the common law theory of recovery commonly known in Texas as the ‘Stowers Doctrine’ shall not exceed the liability of the insured.” Thus, the language of the current statute now limits the liability of an insurer to “the liability of the insured,” which arguably limits the liability of an insurer to the amount of the statutory cap on damages in the current statute, which is in keeping with the tort reform purposes of the 2003 amendment. 56 Baylor Law Rev. 423, at p.457.

Notice Provisions-“Claims Made” Policies:

In Prodigy Communications Corporation v. Agricultural Excess and Surplus Insurance Company, 06-0598 (Texas, March 27, 2009), the Texas Supreme Court dealt with whether, under a claims-made policy, an insurer can deny coverage based on an insured’s failure to comply with policy provisions requiring that notice of a claim be given “as soon as practicable” when notice of the claim was provided before the reporting deadline specified in the policy and the insurer was not prejudiced by the delay. Involved was a ninety (90) day notice of claims “condition precedent” provision in a policy which had been extended by a contractual three (3) year discovery period.

The Texas Supreme Court held that in a claims-made policy, when an insured gives notice of a claim within the policy period or other specified reporting time period, the insurer must show that the insured’s non-compliance with the policy’s “as soon as practicable” notice provision prejudiced the insurer before it may deny coverage. The Texas Supreme Court also implied that if the insured  provides notice of claim outside the policy’s date-specific reporting period, that coverage will not be allowed.

In a companion case, Financial Industries Inc. v. XL Specialty Insurance Company, 07-1059 (Texas, 2009), the Supreme Court dealt with slightly different policy language but nonetheless held that the insurer must show prejudice before an insured’s violation of the “as soon as practicable” notice provision would allow an insurer to deny coverage.

Federal Preemption Limited:

In Wyeth v. Levine, 129 S. Ct. 1187 (U.S., March 4, 2009), the United States Supreme Court held that federal approval of labels giving warnings about the effects of drugs does not bar lawsuits under state tort law claiming inadequate warnings of health risks. While supposedly “narrowly drawn,” this decision nonetheless promises to encourage the filing of products liability lawsuits which have been discouraged or precluded by prior court decisions which have given significant preemptive effect to federal approval of various products. In Wyeth, the dissenting opinion heralded this likely effect when it stated that the majority opinion had turned a “common-law tort suit into a ‘frontal assault’ on the FDA’s regulatory regime for drug labeling….”

By H. Norman Kinzy